In: Finance
Consider a project to supply Detroit with 31,000 tons of machine
screws annually for automobile production. You will need an initial
$6,300,000 investment in threading equipment to get the project
started; the project will last for 5 years. The accounting
department estimates that annual fixed costs will be $1,525,000 and
that variable costs should be $290 per ton; accounting will
depreciate the initial fixed asset investment straight-line to zero
over the 5-year project life. It also estimates a salvage value of
$900,000 after dismantling costs. The marketing department
estimates that the automakers will let the contract at a selling
price of $410 per ton. The engineering department estimates you
will need an initial net working capital investment of $610,000.
You require a return of 14 percent and face a tax rate of 25
percent on this project. a-1. What is the estimated OCF for this
project? (Do not round intermediate calculations and round your
answer to the nearest whole number, e.g., 32.) a-2. What is the
estimated NPV for this project? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g.,
32.16.) b. Suppose you believe that the accounting department’s
initial cost and salvage value projections are accurate only to
within ±5 percent; the marketing department’s price estimate is
accurate only to within ±15 percent; and the engineering
department’s net working capital estimate is accurate only to
within ±10 percent. What are your worst-case and best-case NPVs for
this project? (A negative answer should be indicated by a minus
sign. Do not round intermediate calculations and round your answers
to 2 decimal places, e.g., 32.16.)